Tuesday, May 17, 2011


I read an article this evening that centered on the strange happenings in China recently where watermelons are exploding as rain fell on the land in the midst of a recent drought.  While the rain is needed, experts suggest that it truly isn't the cause of the projectile flinging watermelon bombs, it is the use of the chemical forchlorfenuron on the melons that is reason for the crazy phenomenon.

(click on the link above for the Bloomberg article)

While the simple notion that these guys use anything that will destroy entire fields of melons is scary enough, you've got to take the extra step and ask, what else are they using on food that is imported to the USA?  Wow!  So, let me get this straight, some sort of super growth agent causes watermelons to grow so large that they simply blow up?  Why am I not a bit amazed to find this out?

I love the money quote near the bottom, "About 10 percent of watermelons burst normally, with the rate depending on variety and weather, Xinhua said yesterday citing Xu Jinhua, of the Jiangsu Academy of Agricultural Sciences."  Hmmmm, I wonder if that happens in the USA?

Speaking of unnatural substances and additives, I wonder what the results of QE I and QEII will bring?  Let's think about this analogy a bit more.  In China, the farmers know they probably aren't doing what is really good for the melons or those that consume them, but for the sake of making a harvest and making money (greed) they forgo doing what is honest and right to simply maintain a job and living standard.  In a similar way, we have the Federal Reserve that applies it's own version of forchlorfenuron in the form of super liquidity and abnormal credit support to feed and nourish the "ailing or under growing fruit" of our economy.  Specifically, our economy's bad harvest has been in the banking sector and areas like auto manufacturing and housing.  The Fed too would say that without the unholy stimulus, the fruit might not grow big enough or even may not yield any harvest at all.  And you know what, the Fed and the farmer would be absolutely accurate in their thought process that if they don't act, results could be bad for themselves and those that depend on them to produce. 

The problem behind this justifiable thinking is simply that it is short-sighted and never accounts for the long term material effects of these heroic acts of instant gratification.  Yes, the watermelons grow for the farmer, yet they over do it and explode.  If they don't explode they may have the long term impact of poisoning the unlucky folks that choose to consume their fruit.  Likewise, the Fed makes a choice for today and tomorrow and six months from now, not one that centers on the ultimate outcome of three years or five years down the line.  The Fed doesn't naturally have a hand in developing a manufacturing base or fostering an environment where jobs can be developed for the long haul, no, it props up a broken banking system and through other government agencies sustains a car industry and home building industries that are a disaster, all the while forcing Moms and Pops to take more risk in their assets.

The Federal Reserve is becoming the worst kind of public company that manages their "numbers" for the next quarterly earnings release.  The result of using extraordinary measures is that the initial use of them to save the system has plugged the Fed into the role of "saving the system" on a quarterly or even daily basis. 

What happens if the economy slows?  What happens if we have a flash crash?  What happens if we need some extra money to meet our deficit spending needs?  What happens if interest rates tick up?  The clear answer is simply to call on the Fed who is more than willing to step in AND now is even more willing to communicate through media press conferences after meetings now.  Think of the press conferences now as the quarterly earnings conference call.  The Fed will manage their numbers and do all sorts of accounting tricks to always come in above the "whisper".  Heck, if the Fed needs Jeff Skilling, I think he's available to do all sorts of his Enron-esque accounting tricks.  I'm not sure if he's much of a farmer, but I'm darn sure he's good at spinning a yarn and managing fruit until it bursts.

See once you spray on some chemicals on your garden and the fruit grows like mad, are you really likely to not add that same topical additive to your next year's product?  Not a chance.  The Fed, the markets, and the economy are now accustomed to the introduction and infusion of the Fed's exogenous stimulant and they probably won't perform well and yield much without the damaging liquidity substance.  The problem we've always had with the Fed though is that their actions always end up blowing bubbles, just like these bursting watermelons.  Often, too much of anything is a bad thing.  Just like those Chinese farmers, Ben Beranke just won't stop until he's destroyed the whole field.


Edit -
As I was proofing this document, I had one other thought related to the Chinese minister that mentioned that they had a loss rate of 10% typically on their watermelons due to explosion.  Clearly, the current results suggest that something is really wrong, but more importantly isn't it striking to note that they know that they will have a 10% loss rate and yet they keep on spraying the chemical on it? 

This is important because I think the Fed is using Mom and Pop as their version of the acceptable 10% loss.  In other words, the regular guy that is getting ravaged by low yielding interest rates and high inflation in hard asset commodities like gas and food is the acceptable version of an exploding watermelon on the crop produced by the Fed.  They have made a decision that by adding QE 1 and QE 2 and perhaps even further stimulus that they will simply have some shrinkage, but those are acceptable to be able to take in the harvest.  Clearly the Fed is not organized to serve the average citizen of the United States, corporate giants are the intended targets of the miracle stimulant provided by the Fed.